WASHINGTON – President Trump’s nominee to serve as next IRS commissioner said state enacted workarounds for the new $10,000 cap on the deduction for state and local taxes may present new legal issues for the service.

Charles Retting, President Trump's nominee to serve as commissioner of the Internal Revenue Service, at his confirmation hearing before the Senate Finance Committee on June 28.
Charles Retting, President Trump's nominee to serve as commissioner of the Internal Revenue Service, at his confirmation hearing before the Senate Finance Committee on June 28. Bloomberg News

During his confirmation hearing, the nominee, Charles Rettig, declined to predict how the IRS will treat the workarounds as it formulates new guidance on them.

The Internal Revenue Service announced May 23 it is working on regulations to enforce that cap.

While news headlines after Thursday's hearing focused on Rettig's investment in two rental units at a Trump branded hotel in Hawaii, Sen. Robert Menendez, D-N.J., questioned the California-based tax and estate lawyer on the workarounds. New Jersey and other states have established new charitable deductions as offsets to property taxes or state and local income taxes.

Sen. Robert Menendez, D-N.J. questions Charles Rettig, who has been nominated to serve as IRS commissioner, at a Senate Finance Committee hearing.
Sen. Robert Menendez, D-N.J. questions Charles Rettig, who has been nominated to serve as IRS commissioner, at a Senate Finance Committee hearing. Bloomberg News

Menendez wanted to know if these workarounds would get the same approval from the IRS that other charitable deductions established by states prior to the new tax law have received.

Rettig assured his “incentive with respect to guidance would be that it be accurate, impartial, nonbiased and clear, and issued timely.”

He also pointed out that as a resident of California, “which is working on a similar situation,” he would “still look at it in a nonbiased, impartial manner.”

The IRS and federal courts have previously upheld the legality of smaller scale charitable deductions established 33 states that can be deducted on federal taxes, according to a report issued several months ago by eight law professors.

Most of the earlier state tax credits cover only a fraction of the donation — for instance, 25% or 50% — though a few cover the full amount.

Among them are a 100% South Carolina tax credit for donations of up to $2 million to the Industry Partnership Fund at the South Carolina Research Authority and a 100% credit in Alabama for up to 50% of a taxpayer’s tax liability for donations to scholarship granting organizations.

Retting indicated that the new workarounds may be different.

“It's my understanding that there's a possibility that the post-tax act situation could be not on all fours with the earlier position taken by the Internal Revenue Service in the 2010 chief counsel notice,” Retting said.

The legal term “on all fours” refers to a lawsuit in which all the legal issues are identical.

Menendez nonetheless described the May IRS notice as “fundamentally flawed” because it “contradicts decades of precedent and case law all the way up to the Supreme Court, and discriminates against states, apparently based on political affiliation.”

The New Jersey senator asked whether Rettig would “adhere to the principles of federalism and states' rights, and respect the authority of states to set their own tax policy.”

Rettig gave his assurance the IRS under his stewardship will “follow the law impartially in a non-biased manner.”

The IRS has not indicated when its new guidance will be issued.

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